Currency hedging strategies for businesses

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Buy or sell a fixed amount of currency with a forward contract. WorldFirst will offer you a guaranteed rate at which you can transfer during the tenure of your contract.

A forward exchange contract with WorldFirst can be entered to facilitate payments for identifiable goods, services or direct investment (making a capital investment in an enterprise to obtain a lasting interest in it).

You will be able lock in an interest rate for a stated period for a specified currency pair.

What is a forward contract?

A forward contract is a hedging product that enables businesses to protect themselves from currency exposure and market volatility.

They work by fixing the rate of exchange over a set period on a pre-determined volume of currency and are used to help protect buyers from fluctuations in currency price. There are different forward strategies which can be executed depending on your individual business needs.

Why hedge using a forward contract?

Locking in an exchange rate with a forward contract allows your business to protect its profit margins and internal budgets, whilst remaining competitive.

You will stay in control and create predictability of your cashflow. Given that currencies are traded around the clock, 24-hours a day, it makes sense that exchange rates are in constant flux. With this in mind, it's easy to see how forward contracts enable forward-planning.

What can happen if you don’t hedge?

- Reduce predictability of cashflow and put your internal budget rates at risk

- Business could suffer potential losses to profit margins because of adverse currency fluctuations

- You may have to raise prices in order to protect profit margins following a significant change in the rate, and therefore become non-competitive

Forward contracts – the benefits:

✔ A rate can be fixed, providing certainty over your profit margins. The exchange rate would be locked in for the entire length of the forward contract, providing you with a guaranteed rate of exchange.

✔ If the market rate moves against you, you will not be negatively impacted as you have locked in an exchange rate.

✔ Help with future cash flow planning and potentially mitigating currency risk

Risk analysis | Things to consider with Forward Contracts

Risk management:

It is important to consider your risk appetite and evaluate your budget rate when pre-booking foreign currency. Whilst a forward contract can help you protect your budget rate; it may also be worthwhile exploring other strategies if you are unsure of your requirements. WorldFirst can offer a number of currency strategies for you to consider.

Missed opportunities:

If a currency moves in your favour, you won't be able to capitalise on that opportunity using the pre-booked forward contract, and instead would need to book a spot contract to take advantage of the market movement.

Credit Facilities:

Please reach out to your relationship manager who can look to see whether you are eligible for a credit facility to help cover the initial deposit requirement associated with forward contracts.

Currency hedging strategies for SMEs

Why are Forward contracts useful for your business?

Below are some examples of where a forward contract might be useful for a business:

- To hedge (lock in a rate) a rate to cover an invoice that is dated in the future

- To hedge a rate to cover a percentage of a company’s forecast currency requirements for future supplier payments

- To hedge a rate for project work that is paid in stages for up to 24-months

- To protect forecast exporting revenue from currency volatility

- When profit margins are tight and the ability to adjust the product and pricing is not an option

- When a business has already published their prices on a website/brochure, and cannot re-price their product if the currency moves negatively against the business eating into their profit margin

How do Forward Contracts work at WorldFirst?

Forward Contracts help protect SMEs against currency fluctuations without having to buy currency upfront on the spot market. The forward price is always based on the current spot price . The spot price is the current market price at which a currency pair is bought or sold for immediate payment and delivery. We offer a fully transparent pricing model, which sets the forward contracts being offered apart in the marketplace.

Types of forward contracts

The main types of forward contracts WorldFirst offers are Fixed, Window and Flexible forward contracts. These are outlined below:

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Fixed forward contracts

Allow you to buy or sell an exchange on a determined notional amount for a particular value date in the future. This is known as the value date or maturity date.

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Flexible forward contracts

Give businesses flexibility on when they utilise the forward bought currency. With a flexible forward contract, you can either drawdown funds on or before the maturity date in one go, or, make multiple payments over the course of the contract as long as the total agreed amount is settled by the value/maturity date.

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Window forward contracts

Enable buyers to purchase a specific amount of foreign currency within a range of settlement dates – known as windows – at a predetermined rate.

How to book a forward contract with WorldFirst

There are two ways to book forward contracts with us. Find out more below:

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Are you a newly trading customer?

Give us a call on 020 3918 7826 and one of our expert relationship managers will explain the variety of hedging strategies available. Your relationship manager will clearly cover the below terms to ensure you are comfortable with the conditions of the forward.

These terms include:

- The currencies involved

- Rate of the contract

- Tenure (length) of the contract

- Determining whether you require a fixed, flexible, or window forward

- Explaining deposit/initial margin requirements, in case a credit facility is appropriate to help cover initial margin requirements

- Understanding if you will be using this (forward bought) currency in relation to the sale or purchase of goods or services, or for direct investment

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Are you an existing customer with a WorldFirst Payments account or a World Account?

You can easily book fixed forwards via our 24/7 online platform. If you request a rate further than a spot contract (trade date, plus two days), you will receive a pop-up on your account informing you that you are about to book a fixed forward contract with WorldFirst and that a deposit may be required.

Once you click "Accept Rate & Book Transaction" you will enter a legal contract with WorldFirst to buy or sell the currency you have selected.

For added transparency, you will also receive detailed information on how we calculate margin requests. This information is important in case your rate significantly moves during the tenure of your contract, thus requiring a margin call.

Get an account with WorldFirst

At WorldFirst, we have two different accounts depending on what features suit your business needs. Both accounts are free to open and maintain and come with a dedicated relationship manager that will provide you with any support and assistance you may need.

For more information on what account you need for your business requirements, visit our business page to find out more.

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